Internal Controls,external Regulation And Credit Rating Quality

Against the backdrop of preventing major financial risks,the importance of high quality credit ratings has become increasingly prominent.Since the breaking of rigid payment in 2014,the regulatory environment has undergone significant changes as high-grade credit debt defaults continue to be a problem,and regulators have taken a series of regulatory measures in response.The relationship between subjective scoring behavior and credit rating quality,as a potential influencing factor of credit rating quality,has yet to be studied in depth.This paper takes the quality of internal control of debt issuers as a typical subjective rating indicator and provides insight into the credit rating bias in the subjective rating process of rating agencies.Using a sample of credit bonds issued by listed companies between 2014 and2021,the paper explores the impact of rating agencies’ subjective scoring behaviors and external regulation on credit rating quality.The empirical results of this paper show that credit rating agencies are more likely to subjectively overestimate the credit ratings of companies with high internal control quality due to cognitive biases such as the "halo effect",and higher quality internal controls can lead to greater credit rating overestimation.Strict external regulation can mitigate the overestimation of credit ratings caused by subjective ratings.In addition,the paper further investigates the impact of subjective ratings on credit rating quality in different contexts.The results of this paper show that rating agencies with a low market share are more likely to overestimate the credit ratings of companies with better internal controls in their subjective ratings due to the lack of experience in subjective ratings;rating agencies with a foreign background are less likely to overestimate the credit ratings of companies with better internal controls due to knowledge transfer resulting from the internationalization of rating agencies.In an environment of high market competition,rating agencies are more likely to overestimate the credit ratings of companies with better internal controls;and in an environment of lower transparency in accounting information,the bias in credit ratings due to subjective ratings increases.Unlike the existing literature which focuses on the contribution of internal controls to credit rating levels,this paper examines the credit rating behavior of rating agencies in the subjective scoring process for companies with different internal control quality and the resulting credit rating bias.This paper extends the factors influencing credit rating quality to subjective scoring,adding to the theoretical and empirical evidence on the factors influencing credit rating quality.It provides an empirical reference for credit rating agencies to continuously improve their credit rating evaluation systems and strengthen the quality of supervision by regulators.